I recently visited a popular online forum with information on loan modifications. Many of the people posting messages have adjustable subprime mortgages and are now desperately seeking solutions to their increased payments. The titles of the posts include, "I am Scared" "What a Mess I Got Myself Into" and "What an Expensive Lesson I Just Learned - Never Again." As I read the posts, I thought of how the passengers on the Titanic must have felt as the boat that "could not sink" began to tilt downward into the cold water.
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The great help the lenders claim to be offering the troubled borrower does not appear to be what the borrower is actually getting. When borrowers attempt to modify their loans they are met with resistance from poorly informed "loan modification departments." While help from the government seems promising, three weeks have gone by since President Bush announced steps at the Federal level to help homeowners avoid foreclosure. The Federal Government has instituted plans to help an estimated 60,000 delinquent - though credit-worthy borrowers. These borrowers will be able refinance into FHA insured loans. This aid will be available to people who were steered into high cost loans with teasers rates. This may be great help for 60,000 people, but what about the other two million borrowers whose monthly payments are about to rise over the next eighteen months? Our Federal Government's response leaves them out in the cold.
Using another analogy, I am reminded of the response to the Hurricane Katrina disaster. Slow and inadequate is how the government responds. What we need to see is a "financial triage department" in every lender's office. In the immediate chaos of Katrina, nobody knew what was going on. Now, many months later, policies are still being written and rewritten. The situation is similar with mortgage crisis. Federal Chairman Ben Bernanke cut the interest rate a half a point which some thought would cause all the mortgage investors to change their loan modification policies. However, more and more lenders are filing bankruptcy, and the ones that are staying in business are laying off employees by the thousands. Many lenders are also becoming defendants in lawsuits brought by their investors.
If you have found yourself facing a mortgage payment you cannot afford, and are contemplating asking your lender for a loan modification, you must know the economic reality. Lenders and their investors are only concerned with profitability. That is, they base their decisions solely on monetary return. They want to see that modifying the loan will be more profitable than foreclosing on the subject property. The lenders want to know you can make the modified monthly payment without fail.
Because the majority of borrowers who are faced with unaffordable payments are victims of teaser rates becoming expired, the modified payment will be higher than the teaser rate. This means that if the borrower could barely afford the teaser payment, there is little chance of paying a higher amount, no matter how small the increase. For borrowers with the ability to slash their living expenses, do without an extra automobile or cell phone, and come up with extra money for the mortgage payment, the lender may be willing to accept less than the full increase in payment. The borrowers with the ability to pay close to what the lender requires are the ones most likely to get a loan modification.
All economic indicators project that for many subprime borrowers with adjustable rate mortgages, default will eventually occur. Capitalistic wisdom should dictate that financial institutions will cut their losses now and not want to be taken down in the spiral as real estate values plummet over the months to come. The lenders knew that the subprime loans were made to high risk borrowers, but they took the risk. Now that they are faced with defaults on their investments, they may be willing to lose some profit to avoid further loss.
For those who are pursuing a negotiation for loan modification with their lender, here are my suggestions:
1. LEARN YOUR LENDER POLICIES
Become knowledgeable and familiar with your lender's loan modification policies. For rate modifications, know if the lender will accept an application before the rate becomes adjustable or increases. Some lenders require a borrower to be delinquent for at least three months before they even accept an application for loan modification. Lenders often have different policies for borrowers who can no longer pay due to job loss or health issues.
2. GET YOUR LENDERS LOAN MODIFICATION PACKAGE BEFORE YOU START NEGOTIATING
Before calling and giving all your information, ask for a written loan modification package from your lender. If they are willing to send you an application, you will see what information they need and what their policies are. You will then have time to reflect on your answers and not be pressured into answering over the telephone. Additionally, when lenders have their own unique forms, any applications which are not submitted on those forms will fall to the bottom of the pile and face delay in processing.
3. KEEP YOUR COOL
Keep in mind that you are dealing with a department staffed with people who are swamped with calls from irate borrowers, each with the same sad story. These employees become callous to the plights of the borrowers. Furthermore, their employer, the lender, changes the policies and procedures almost daily. In addition, the employees are worried that they will lose their jobs when the lender makes additional job cuts. They may be calling their own mortgage company's loan modification department next week. You are stressed, and so is the person on the other end of the telephone.
4. DOCUMENT EVERY COMMUNICATION MADE
Keep a log of every telephone call or letter made, and every telephone call or letter received. Include emails and faxes in your log. Make certain that your log contains dates, times, names, and titles. This information may be necessary to document what has been promised by the lender.
5. CREATE AN ACCURATE AND DETAILED EXPENSE REPORT
Lenders base their decisions on your monthly budget which includes your income and expenses. They are not interested in your hardship story, only in learning whether the hardship is over. They are interested in knowing exactly how you are going to make your monthly payments. They want to see a sensible, realistic, and reasonable monthly budget. For example:
a. If you are applying for a rate modification, your lender will want to see that you have a negative residual income. This shows that you cannot afford a rate increase. You will also need to that you have discharged all possible expenses that are considered "excess" or "luxury living." You must provide evidence that you have done all you can to lower your monthly expenses. They do not want to see expenses for multiple cell phones, premium cable television, designer clothes, or extravagant dining and entertainment expenses. They want to see that your car payment matches a frugal lifestyle, meaning you do not drive a new Hummer.
b. A string applicant will have a monthly budget with a residual income about 25% greater than the monthly mortgage payment. This means that if your mortgage payment is $2,000 per month, you have an income of $2,500. These numbers must be verified by your bank statement or other documentation.
c. If you lose your source of income due to unemployment or medical reasons, the lender will want to know whether such loss is permanent or temporary. If temporary, the lender will need to be assured that your income will return in the near future. A permanent loss of income will result in denial of your loan modification.
6. HAVE A GOOD FAITH DEPOSIT
I saved this point for last, because most borrowers do not understand its importance, and I want to make sure that it gets attention. Imagine being the lender and a borrower who has missed several months of payments calls you. That borrower tells you that he has not been able to make any payments because the adjustable rate kicked in and the payment was too high. This borrower filled out all the application forms and has begged for a loan modification. The borrower has explained that he can pay a certain amount, but not the whole amount. You immediately think to yourself, "Well then, why has this borrower not made any payment at all?" More to the point, you wonder what this borrower has done with the money he would have used to make the mortgage payments had the rate not increased. Can you see the problem here? This borrower better have the mortgage payments in his savings account and be ready to tender that amount to the lender as a good faith deposit. Failure to do so will likely result in a denial of the loan modification.
In summary, lenders will modify loans only if the borrower can convince them that it is in the lender's best financial interest to do so. That is what they want to see. They want to be assured that, no matter what, you want to keep your home and will do everything you can to make your payments.
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